Under the provisions of Section 77A of the Companies Act a company, if authorized by its Articles and special resolution can purchase its fully paid up shares own shares and similar securities under the employees’ stock option scheme out of its free reserves, securities premium account and share proceeds to the maximum extent of 25% of its total of paid up capital and free reserves, either from the existing shareholders on proportionate basis or from the open market or from securities under the employees stock option scheme or from odd unmarketable lots of securities of listed companies.
However, redemption of redeemable preference shares, surrender of shares, forfeiture of shares, acceptance by the company of shares as a gift and cancellation of unissued shares, purchase under an order of the Court in a scheme of arrangement or amalgamation under Sections 391-394 of the Companies Act, are not considered as buy back of shares. Consequently the company is not required to comply with provisions of the said Section 77A.
The objects of buy back of shares include the following: -
to block takeover bids
to return surplus funds to the shareholders
to enhance earnings or dividends per share
to support share prices during lean periods
to provide an exit route to those shareholders seeking to sell off their holdings
Companies find restructuring through Court under the provisions of Sections 391-394 to be more convenient than either the stringent conditions for capital reduction under Sections 100 to 104 or buy back of its securities under Sections 77A, 77AA and 77B. Moreover any corporate re-engineering scheme through Court under the said Sections 391-394, being all pervasive, can also include the ingredients of capital reduction or buy back of shares within its components.
